Our groundbreaking papers

The Volatility Effect: Lower Risk Without Lower Return

By David Blitz, Pim van Vliet, July 2007

We present empirical evidence that stocks with low volatility earn high risk-adjusted returns. The annual alpha spread of global low versus high volatility decile portfolios amounts to 12% over the 1986-2006 period. We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process.

Factor Investing in the Corporate Bond Market

The work by Patrick Houweling and Jeroen van Zundert aims to show that the factors used successfully in equity market investing can also work in the corporate bond market. Investors have long used the four main factors low-risk, value, size and momentum to pick stocks that on average have a higher-risk adjusted performance than others due to their characteristics. However, relating this quantitative investment style to corporate bonds is still in its infancy. Their research into the effects of value, for example, is so new that the industry does not yet even have a commonly agreed definition as to what ‘value’ means when applied to corporate bonds.

The Success of Stock Selection Strategies in Emerging Markets: Is it Risk or Behavioral Bias?

By Jaap van der Hart, Dick J. C. van Dijk, Gerben J. de Zwart, 2005

We examine competing explanations, based on risk and behavioral models, for the profitability ofstock selection strategies in emerging markets. We document that both emerging market risk and global risk factors cannot account for the significant excess returns of selection strategies based on value, momentum and earnings revisions indicators. The findings for value and momentum strategies are consistent with the evidence from developed markets supporting behavioral explanations. In addition, for value stocks, the most important behavioral biasappears to be related to underestimation of long-term growth prospects, as indicated by overly pessimistic analysts' earnings forecasts and above average earnings revisions for longer postformation horizons and by quite rapidly improving earnings growth expectations. Furthermore, we find that overreaction effects play a limited role for the earnings revisions strategy, as there is no clear return reversal up until five years after portfolio formation, setting this strategy apart from momentum strategies.

In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return exceeding 9% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by implicit beta exposures or the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away.

Residual Momentum

David Blitz, Joop Huij, Martin Martens, August 1, 2009

In this paper we examine a momentum strategy based on residual stock returns. We find that residual momentum exhibits risk-adjusted profits that are about twice as large as those associated with total return momentum. Moreover, we find that the main arguments that have been put forward in the academic literature to rationalize momentum are unsuccessful in explaining residual momentum. Our results have important implications for the theoretical debate on market efficiency as well as the practical implementation of momentum trading strategies.